Priceline.com ( PCLN ) reported strong results in the second quarter with earnings exceeding the Zacks Consensus Estimate on revenues that were just short. Share prices rallied through the day yesterday in response to the strong results and did not move much in the after-hours.
Priceline reported revenue of $2.12 billion in the quarter, up 29.3% sequentially and 26.4% from the year-ago quarter. This was better than management's guidance of $2.08 billion (at the mid-point).
Revenue by Channel
Priceline's operating model has been changing over the last two years or so, with the merchant business gradually becoming a smaller part. This is mainly because the agency business has been growing much faster.
Both segments grew sequentially, with agency up 41.6% and merchant 7.6%. Merchant revenues declined 2.2% due to the opaque business, which remained impacted by the non-availability of discounts in a strengthening travel market and a share shift to express deals. Agency revenues jumped 38.5%, more than making up for the decline. The merchant/agency mix went from 32%/63% in the March quarter to 27%/69% in the last quarter.
Other revenue was up 11.2% sequentially and up 131.6% from last year, benefiting from the Kayak acquisition.
Room nights, rental car days and airline tickets grew a respective 7.4%, 16.3% and 5.0% sequentially and 29.1%, 14.4% and 23.5% from last year. Overall ADRs for the consolidated group grew around 3% on a local currency basis, slightly better than Expedia's ( EXPE ) 2%.
Priceline's overall bookings were up 10.2% sequentially and 33.8% year over year, over the guided range. Foreign currency had a slightly positive impact on gross bookings in the last quarter.
Both international and domestic bookings grew strong double-digits from the year-ago quarter with international growth being stronger than domestic. Domestic was stronger sequentially. Agoda.com was impacted by the civil unrest in Thailand but along with Booking.com continued to help the company build position in Asia. The company recently expanded its relationship with Ctrip International ( CTRP ) to further strengthen its position in the region.
Sequential growth of 10.1% in agency bookings was slightly lower than merchant bookings growth of 10.9%. But its 37.5% growth from last year was much higher than the 15.7% increase recorded for the merchant business.
Priceline reported a pro forma gross margin of 88.7%, up 300 basis points (bps) sequentially and 631 bps year over year. Higher volumes and the addition of Kayak helped the margin in the last quarter. Because of the nature of the business and the mix of agency versus merchant revenue, management usually uses gross profit dollars rather than margin to gauge performance during any quarter.
Priceline's gross profit dollars were up 33.9% sequentially and 36.1% from last year. Both international and domestic gross profits were up strong double-digits, although international growth was higher than domestic. The expansion in domestic profit is largely due to Kayak. The rapid growth in Asia and Latin America where ADRs are low and margins respond strongly to higher volumes is the main reason for the expansion of the international gross profit.
Priceline's operating income jumped 63.8% sequentially to $756.0 million but the more important thing is, this was also 31.2% above year-ago levels. The operating margin of 35.6% expanded 749 bps sequentially and 132 bps from the year-ago quarter. All expenses declined sequentially as a percentage of sales, but S&M also declined from last year. Online advertising and personnel expenses declined the most sequentially at 160 bps and 140 bps, respectively. However, online advertising was up a very substantial 256 bps from last year.
Priceline reported adjusted EBITDA of $809.4 million, up 30.3% from the year-ago quarter, better than management's expectations of adjusted EBITDA in the $725-775 million range.
The pro forma net income was $603.8 million, or 28.4% of revenue, compared to $360.7 million, or 22.0% in the previous quarter and $470.4 million, or 28.0% in the year-ago quarter. Our pro forma estimate excludes charges related to amortization of intangibles, other charges and tax adjustments, and includes stock based compensation of 66 cents a share in the last quarter.
Including these items, Priceline's GAAP net income was $576.5 million or $10.89 a share, compared to $331.2 million, or $6.25 a share in the March 2014 quarter and $437.3 million, or $8.39 a share in the year-ago quarter.
Priceline ended with a cash and short term investments balance of $7.16 billion, up $454.2 million during the quarter. Priceline generated $690.0 million of cash from operations. It spent around $32.3 million on capex, $98.4 million on the OpenTable acquisition and less than a million on share repurchases.
At quarter-end, Priceline had $1.76 billion in long-term debt and $41.3 million in short term debt, totaling $1.81 billion. The net cash position at quarter-end was $5.36 billion, up $502.4 million during the quarter. Days sales outstanding (DSOs) were around 36, up from 35 at the beginning of the quarter.
For the third quarter, Priceline expects total gross bookings to grow 19-29% year over year (18-28% on a local currency basis), with international growing 22-32% (21-31% on a local currency basis) and domestic growing 10-15%. This is expected to yield a year-over-year revenue increase of 15-25% ($2.72 billion at the mid-point, slightly lower than the Zacks Consensus of $2.78 billion).
Priceline expects gross profit dollars to increase 21-31%, with the adjusted EBITDA at $1.265 billion to $1.365 billion.
The pro forma EPS is expected to come in at $19.60-$21.10, based on a 16% tax rate and 53.4 million shares. The GAAP EPS is expected to be $17.86 to $19.36. Analysts were expecting pro forma earnings of $11.34 a share when the company reported earnings, well below the guided range. Management excludes stock based compensation from pro forma calculations and if this is expected to remain at around 66 cents in the next quarter, the adjusted guidance would be $19.69, still a good bit higher than analyst estimates.
Priceline reported a very strong quarter, with both revenue and order growth topping management expectations. The numbers seem to indicate that its aggressive TV ad campaigns are paying off, yielding share gains. Priceline's decision to significantly increase inventory, especially in the lower-priced segment in Europe is also likely to have helped.
Priceline has also been steadily building position in emerging international markets. It is not only increasing its hotel inventories, but also entering into strategic alliances and making acquisitions that could help growth in the future.
The company's international business continues to do very well, but there are indications of its taking share away from Expedia in the domestic market. The OpenTable acquisition could help on this front. Online travel companies in general have been collaborating to generate additional revenue all over the world and Priceline is no different. The recently announced expansion of its relationship with Ctrip is likely to help its business in Asia.
Priceline will continue investing in the business (look for a continued uptrend in advertising) to push growth and especially to continue its international expansion strategy.
The company has started providing conservative guidance, which has been well below expectations, but has come back to beat those expectations very strongly. This may be a good plan to keep shares buoyant. Execution certainly doesn't seem to be a problem.
Priceline shares currently carry a Zacks Rank #3 (Hold), while peers Orbitz Worldwide ( OWW ), MakeMyTrip ( MMYT ) and Chinese travel booking company Ctrip. Expedia has, however, pulled ahead and currently carries a Zacks Rank #1 (Strong Buy).